12 September 2016

NED’s in firing line after collapse of BHS

Meriel Schindler
Partner | UK

The collapse of BHS led to the loss of 11,000 jobs and put 20,000 pensions at risk.  Sir Philip Green has been roundly criticised for the fact that he offloaded an ailing BHS with substantial pension deficits to a thrice bankrupt buyer with no retail experience, who ultimately drove it over a cliff. But Sir Philip is not the only one is the firing line. Lord Grabiner, an eminent commercial barrister, served as the non-executive Chairman of the Taveta Group boards which owned BHS and were ultimately owned by Lady Green.  MP's described Lord Grabiner's performance in that role as ‘_complacent_' and ‘_the apogee of weak corporate governance_'. Lord Grabiner could face proceedings for disqualification as a director which, if successful, would also prevent him practicing as a barrister and possibly eject him from the House of Lords, where he sits as a life peer. Disqualification proceedings can be taken against any director or shadow director who has been a director in the last three years of the company's trading. The MP's quizzing Lord Grabiner referred to the non-statutory UK Corporate Governance Code, produced by the Financial Reporting Council (FRC). Although the Code does not apply to private companies (such as those in the Taveta Group), MP's described it as containing ‘useful guidance for the interpretation of the legal duties which apply to all directors'. The Code stipulates that the Chairman is responsible for leadership of the board and ensuring its effectiveness on all aspects of its role. Non-executive directors are there to scrutinise the performance of management and provide ‘constructive challenge'. A closer look at the Taveta Group company boards shows that they were replete with friends and relations of Sir Philip, who were unlikely to challenge him, constructively or otherwise. The FRC specifically warns against creating boards which encourage ‘groupthink' and advocates instead board diversity, not just in terms of sex and race but also approach and experience. Lord Grabiner himself appears to have been asleep at the wheel. He played no active part in the decision to sell BHS. Instead the board appointed a sub-group from Arcadia to look into the sale. Surprisingly, this group had no parameters or guidelines, did not keep minutes of their discussions and, crucially, were not required to report back to the Board with a recommendation as to sale options. Neither the Chairman nor the board as a whole were in any position to question the work of the sub group. The full board only knew that discussions were taking place, but did not know the identity of the potential buyers or nature of the proposed deal. Directors (and non-executive directors (NEDS)) are required to have regard (amongst other matters) to:

  • the likely consequences of any decision in the long term,
  • the interests of the company's employees,
  • the need to foster the company's business relationships with suppliers, customers and others,
  • the impact of the company's operations on the community and the environment,
  • the desirability of the company maintaining a reputation for high standards of business conduct, and
  • the need to act fairly as between members of the company.

NED's would be well advised to articulate challenges to management and board decisions in terms of these various perspectives so that the board debates them fully. If there is no forum for debate and the board is being steamrollered by one individual, then the NED may have to resign and ensure that the reasons for that resignation are recorded. Good lawyers like Lord Grabiner never ask questions in court to which they do not know the answer. Good directors, by contrast, should be prepared to ask difficult questions to which no one may know the answer and which require further analysis, investigation and debate.

Meriel Schindler Partner | London

Category: Blog